More Predictions of Dividend Hikes For 2010 (MAT, AWK, XOM, WCRX, AMGN, GPS, MMM, GE, JPM, TWX)

Companies seemed to prefer share buybacks in 2007 and 2008, and maybe part of 2009.  Why not, if the stock is cheap?  But then 2009 came and many companies were derailed by the recession and that forced many big names to do the unthinkable… dividend cutting.  But now things have started adjusting to the new normal and dividend payouts are either being lifted or being brought back closer to their former payout rates.  There are many big companies which are likely to hike their dividends, and some which need to start paying dividends.

Mattel, Inc. (NYSE: MAT), American Water Works Company, Inc. (NYSE: AWK), Exxon Mobil Corp. (NYSE: XOM), and Gap Inc. (NYSE: GPS) are all probably shoe-ins to raise their dividends in 2010.  There are two picks we have in the BioHealth arena which need to start paying dividends. Those are Warner Chilcott plc (NASDAQ: WCRX) and Amgen Inc. (NASDAQ: AMGN) and we have longer explanations about why these companies should start paying a dividend.  3M Co. (NYSE: MMM) should be in here as well as we assumed it would keep up with tradition, but the company boosted its payout on Tuesday night as the edits on this were being completed.  Interestingly enough, this 3M dividend hike is likely to bring General Electric Co. (NYSE: GE) back to the higher dividend payout sooner rather than later.

This is not the first dividend picking session.  Just listed on Monday were ten key large companies we expect to see dividend hikes in 2010.  While General Electric Co. (NYSE: GE) was one of those, JPMorgan Chase & Co. (NYSE: JPM) is likely to be back at the dividend table sooner than Jamie Dimon might have led you to believe.  If you think dividends haven’t been getting bumped up, just take a look at Time Warner Inc. (NYSE: TWX) and a slew of other large companies that just juiced up their dividend rates in recent trading days.

We have examined company finances, dividend histories, share prices, and yields to make several determinations.  Dividend coverage is key, because for companies to grow they cannot pay out 100% of their income.  It isn’t as though any of these are REITs.  In most of these predictions there is even a new dividend target given as a bogey.

Mattel (NYSE: MAT) pays an annual dividend of $0.75 per year, which has been the same rate since 2007.  This may seem telegraphed because Hasbro Inc. (NYSE: HAS) recently did so well with earnings after it beat its earnings projections.  But things are back on track here with Barbie and it claimed strong ‘wheels performance’ from HotWheels.  Year-end cash on hand was $1.1 billion, up from about $618 million at the end of 2008.  After its rival boosted its dividend, the only obvious risk is a hard double-dip recession.  Mattel even noted in the conference call recently that dividends are more important than share repurchases. As long as the world doesn’t fall back over the cliff, Mattel may need to hike its dividend just to keep up with the Jones family… or to stay ahead of them.  Hasbro’s dividend pre-hike had ‘only’ been steady for about two years rather than the three years calendar years at Mattel.  Thomson Reuters has 2010 Mattel targets at $1.61 EPS, so the annual dividend hike has much room to go up.  Because of the current sentiment change and the possibilityof a double-dip recession, the dividend hike here may only go to $0.80 or $0.85 from the $0.75 currently paid.

American Water Works Company, Inc. (NYSE: AWK) is still a  recent IPO after the Germans bought it out from under us through RWE.  The initial dividend was $0.20 first then went up to $0.21.  This last dividend announced was the seventh dividend, so we’d expect to see a hike in about two quarters if all goes remotely well.  The dividend coverage is ample at an estimated 65% of income paid and would come to $0.945 annualized versus a higher rate of $0.22 per quarter or $0.88 per year. That being said, we think the dividend will go to $0.22 or $0.23 per quarter on the next hike if the company sees no issues in making 2010 guidance.  Estimates from Thomson Reuters are $1.28 EPS in 2010 and that figure is $1.44 EPS for 2011.  What group of stocks was always known for big dividends?  Yep, utilities.

Exxon Mobil Corp. (NYSE: XOM) is due to raise its dividend whether it closes XTO Energy Inc. (NYSE: XTO) or not… with a caveat.  That merger is still up in the air and we are not so sure it has all the friends needed to close the deal.  But Exxon has raised its annual payout  each year and we have seen four straight quarters of $0.42 dividends… This last dividend hike was its most conservative dividend hike in at least five years as far as a percentage jump.  ExxonMobil’s dividend payments to shareholders have also grown at an average annual rate of 5.7% over the last 27 years.  XTO is a factor here, that we have to admit. Those pesky refining operations which every oil refiner under the sun is getting killed by are also going to be a drag on how much Big Oil wants to juice its dividend payments.  But the yield is only 2.6% now and could go much higher.  The company has roughly 4.727 billion shares outstanding.  The company retired 5% of its stock in 2009 and distributed a total of $26 billion to shareholders, with about $18 billion to purchase shares in excess of dilution.  The company noted that it was going to buy $2 billion in stock this quarter, although that could be less due to trading restrictions after the filing of the XTO Energy merger proxy.  Oil prices are always a huge wild card here in calculating earnings, but Thomson Reuters has estimates of 5.79 for 2010 and $7.33 EPS for 2011.  At $1.68 in annual dividends today, Exxon could almost double its payout as long as the near-term socio-economic policies in Washington D.C. do not go off the deep end.  Exxon may take a bit longer to announce its higher payout, but we have little to no doubt it that Big Oil will break tradition here.

Gap Inc. (NYSE: GPS) has paid the same $0.085 per quarter payout since April 2008, and before that it paid out a quarterly payment of $0.045.  The stock has been dead money for years and years, and to call this a struggling turnaround would be an understatement.  But if you look at what the new CEO Glenn Murphy has been able to carry out you might want to plant a kiss on his face.  We are not even calling one of its brands by the insulting name of ‘Old Lamey’ any longer because the company has finally gotten back on track.  Its price points may make it a recession winner, but the damage that was done over years to the brand seems to have subsided and the company is still making closures and select openings as needed.  We do not have the Jan-2010 earnings behind us yet nor do we have Jan-2011 guidance, but Thomson Reuters sees estimates of $1.56 EPS for this past year and $1.69 for the year ending in Jan-2011.  The annual dividend is only $0.34 per year, and that gives off a yield of 1.7% today.  It may be a safe bet that the company will take the payout to $0.10 per quarter, which at today’s share price would yield just over 2%.  If Gap wanted to be even more competitive in its dividend yields it could bump that up to $0.12 per quarter… but let’s not get carried away.  There is still much work to be done at Gap despite the huf improvements that have been made.

Warner Chilcott plc (NASDAQ: WCRX) may have quietly and rapidly emerged as one of the greatest drug companies on the scene in years.  If all goes well and according to plan, the company may be one of the best value stocks out there in the land of pharma and biotech.  The company pays no dividend, but after we get a couple of more quarterly adjusted balance sheets behind us it seems as though the company will want to join the yield payout of Big Pharma.  Perhaps not as much as the 4% from Merck & Co. (NYSE: MRK) and Pfizer Inc. (NYSE: PFE), but it will likely want to get on the map.  Many investors still do not even really know the company.  It completed the acquisition of the global branded pharmaceutical business from The Procter & Gamble Company (NYSE: PG) on October 30, 2009, and the stock has done very well since.  Its most recent guidance is as follows for 2010: Adjusted total revenue for 2010 after the impact of its distribution agreement with LEO Pharma A/S in range of $2.9 to $2.95 billion; Adjusted gross margin of 88% to 89%; Total SG&A expenses in the range of $1.2 to $1.25 billion; total R&D in the range of $180 to $200 million; net income of $190 to $215 million; adjusted cash net income in the range of $842 to $867 million; and using 255 million ordinary shares adjusted cash net income per share of $3.30 to $3.40 per share for the full year 2010.  Again, we expect a couple more quarters to pass before a dividend is launched, but barring any other mergers we would expect the company to get on the map with a dividend.  With shares close to $25.00, a 4% yield would be about $1.00 per year of that $3.30 to $3.40 per share in 2010 earnings. An estimated guess is that the dividend will start at about $0.60 to $0.75 per year, for now.

Amgen Inc. (NASDAQ: AMGN) is not a likely “dividend booster” on the surface and not just because it wants to be thought of as a biotech that does not pay dividends.  So far, the company has chosen to conduct share buybacks to deploy cash and it is not in a hurry to begin paying a dividend.  In the investor Q&A of its investor relations site, the phase is there: “Amgen does not pay a dividend on stock, and does not foresee doing so in the immediate future.”  There is an issue though and that is that the expected earnings growth leaves more and more room for Amgen to begin rewarding its shareholders.  It recently announced a $5 billion share buyback, on top of the $1.2 billion remaining at the time still authorized for buybacks.  But share buybacks were the shareholder-friendly actions of 2007 to 2009.  In the new normal, the dividend may matter more to holders who want to get money back from companies.  We do not want to say that Amgen has been dead money for five years, but it has been very quiet money.  For more than 3 years the stock has had a hard time staying above $60 for very long.  And for some time we have noted that Amgen is effectively valued more like a Big Pharma stock than a biotech stock.  With $5 billion in cash flow and with a mountain of cash, it can afford a dividend on top of its debt and on top of its buyback plans.  Both Merck & Co (NYSE: MRK) and Pfizer Inc. (NYSE: PFE) yield close to 4%, and Amgen could easily afford to pay close to 2% or $1.00 per share for its initial dividend rate.  A big acquisition is likely to take its stock lower as we have seen in most buyer situations.  Amgen could always pay down some of its debt, which would be viewed as favorable.  But initiating a dividend, and a noticeable one, might be the best effort the company could make.

As for the ten other dividend growth predictions, those can be found here; while the other large companies that have already declared dividend increases can be found here.

JON C. OGG